Update: FINRA Advertising Rule 2210

Regulatory Change Management

By Len Derus

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FINRA recently filed a proposed rule change to Rule 2210 which, if passed, will allow FINRA members to provide projection of performance or targeted return information in communications to institutional investors or other qualified purchasers (QPs).  The following is a summary of some key points found within FINRA’s proposed change to Rule 2210 (SR-FINRA-2023-016).

Overview of Proposed Rule Change (SR-FINRA-2023-016)

FINRA Rule 2210 generally prohibits the use of projections, unwarranted claims and implying that past performance is indicative of the future. Today, this prohibition is conditional, allowing for exceptions such as “hypothetical illustration of mathematical principles,” the use of an “investment analysis tool,” price targets in certain research reports, and communications regarding futures and options. 

In short, this rule change proposal seeks to create a new exception to the general prohibition of projections. If approved, it permits institutional communications to include projections of performance or targeted returns, but only under specific conditions.

Newly Permitted Recipients of the Information

The new exception applies to communications made exclusively to institutional investors. There is also a provision for a new category called “Projection-Eligible Investors,” which includes both institutional investors and investors in certain private placements sold solely to qualified purchasers.

Conditions for Exception

The proposed rule change does impose conditions on providing these projections, including:

  • The adoption of written supervisory procedures. These procedures would include, among other items, ensuring the communication is “relevant to” the investor in light of their financial status and investment objectives, and ensuring the various required disclosures are being provided. If your firm is utilizing third-party models or software to create projections or targeted returns, your procedures must be structured such that the information from the third party meets the requirements of the proposed rule change.
  • Having a reasonable basis for criteria and assumptions. In the filing, FINRA outlines previously mentioned disclosure requirements which include the description of methodology and key assumptions, as well as risks and limitations of using the information in making a decision regarding investments. The proposal further spells out several factors to consider when determining the “reasonableness” of criteria used in the assumptions.
  • Disclosure of the hypothetical nature of projections.
  • Providing sufficient information to investors. Importantly, FINRA member firms will be expected to provide sufficient information to enable investors to understand the basis of projections and the associated risks.

Comparison to Existing FINRA Rule 2214

The filing also highlights key differences between the proposed rule change and existing requirements under FINRA Rule 2214, which permits projections for retail customers through interactive investment analysis tools. Specifically, the proposed rule change does not require there be an “interactive element,” such as when a retail investor utilizes an online investment analysis tool to get individualized results.

Under the proposal, the information being provided would not need to consider potential returns in various scenarios and the probability of each scenario’s success.

The disclosure requirements in the proposed rule change are also described somewhat differently than those required by Rule 2214.

Consider the Impact of Reg BI

Lastly, be sure to consider the requirements of Regulation Best Interest (Reg BI) when using projection of performance or targeted return in connection with a recommendation of a securities transaction or investment strategy to a retail customer that is a qualified purchaser.

In the filing, FINRA specifically mentions “including reasons why the projected performance or targeted return might differ from actual performance.”

Preparing for Change: What Firms Can Do

Understanding upcoming or even proposed rule changes allows you to assess and plan for updates to supervision, systems and other activities at your firm. Assessing your processes related to advertising and communications with the public is the first step in proactively understanding what changes will be necessary to comply with FINRA’s proposed rule change. Oyster Consulting’s compliance experts have the experience to review your program, and determine if your firm has the necessary procedures in place to review, approve and update advertising under the current rules, and in anticipation of the change.

Oyster Solutions automated compliance software can ensure that your firm’s policies and procedures supporting your advertising program are administered consistently and documented. While your end users will love the ease of use, you will have access to robust reporting for the oversight and surveillance regulators demand.     

About The Author
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Leonard Derus

Leonard Derus is a seasoned financial services professional with over 20 years of experience in Compliance and Risk Management, Control Process Development and Implementation, as well as Program Development,  Management and Training.